Over the last decade, we have witnessed a revolution in cross-border tax information exchange and reporting—with significant repercussions for global tax compliance, tax planning and tax enforcement.
During this period, increasing amounts of information have emerged from a range of sources including taxpayers themselves, third parties with information reporting or withholding obligations, government investigations, whistleblowers, media sources, hackers and foreign tax administrations. Importantly, tax information often travels through two or more of these sources or repositories before arriving at an end user. Given the centrality of data in determining tax liabilities, audit and enforcement actions, and tax policy, it is not surprising that major changes in flows of tax information could notably influence the tax system.
The dramatic shift in the scope, quantity and content of tax information making its way to tax authorities has been the product of multiple forces, but two in particular — politics and technology — have been powerful drivers behind hard and soft law reforms and the resulting information exchange revolution. Neither force alone would have been potent enough to compel changes: Jurisdictions required both the political commitment to reform their information practices and laws, as well as the technical ability to meaningfully follow through on those commitments with some measure of efficiency, accuracy and functionality. One only has to imagine trying to implement the level of data transfer now underway electronically, through a paper-based process.
As these changes become established features of the tax system worldwide (for example, the common reporting standard, foreign account reporting, beneficial ownership reporting requirements, and country by country reporting) states will regularly transmit and receive from each other (and from taxpayers and third parties) ongoing, sizable flows of taxpayer data. States can expect to accumulate large stashes of information on cross-border income, assets, and activities on a scale and level of comprehensiveness previously unmatched.
However, the adoption of the hard and soft law practices undergirding the tax transparency and disclosure revolution is not the end of the story. Pressing follow-up questions persist regarding the issues that nation states will confront when data from across the global finally arrives at the doorstep of domestic tax enforcement agencies. Some of the concerns, for example, those about data protection and use, were first raised as challenges to the adoption of the various new cross-border information exchange regimes. Additionally, some questioned whether the effort to gather, collect and transmit extensive quantities of data to tax authorities will be worth the effort if such tax authorities lack the requisite data analytics capabilities to make meaningful use of all they receive. Although that battle has passed (for the moment), as the implementation phase gets underway, it remains important to undertake a comprehensive examination of how governments might use (or not use) data, and when those uses will pose unacceptable risks. Just as politics, technology, and law came together to define the current international tax information revolution, so too are they likely to interact and shape enforcement outcomes going forward.
Despite the primary focus we see at this stage on technology and infrastructure (for example, continuing discussions about how to best train, equip and resource tax authorities to effectively use massive inflows of data), domestic politics will play a dominant role in tax enforcement and in data use and protection as countries now enter the implantation phase. For example, although the collective political will on a global level produced the information revolution, it remains possible, even plausible, that domestic political forces will work to derail the revolution in practice or redirect the use of data to other purposes. At this stage in the process, it is important to begin to map the likely and potential risks for nation states as they begin to wrestle with larger flows of international tax data. One of these important risks will be whether domestic legal regimes will have the capacity to protect taxpayer privacy and constrain distributional outcomes in a politics-driven world in which taxpayer data becomes ubiquitously available.
Guest blog by Diane Ring, Professor of Law, Associate Dean for Faculty, and The Dr. Thomas F. Carney Distinguished Scholar, Boston College Law School (USA). Diane is a speaker at this month's ADIT Conference in London, on Friday 13 September 2019. Visit www.adit.org/conference.
The blog is based on Diane's work with her co-author, Shu-Yi Oei (Boston College Law School) including: (1) The Domestic Politics of the International Taxation Data Revolution (on file with the authors); (2) Leak-Driven Law 65 UCLA L. Rev. 532 (2018): and (3) Falling Short in the Data Age (on file with the authors)